Renting below fair market value
You can deduct your expenses only if you incur them to earn income. In certain cases, you may ask your son or daughter, or another relative living with you, to pay a small amount for the upkeep of your house or to cover the cost of groceries.
You do not report this amount in your income, and you cannot claim rental expenses. This is, in fact, a cost-sharing arrangement, so you cannot claim a rental loss.
If you lose money because you are renting a property to a relative or friend for a lower rate than you would rent it to other tenants, you cannot claim a rental loss.
When your rental expenses are consistently more than your rental income, you may not be allowed to claim a rental loss because your rental operation is not considered to be a source of income.
However, you can claim a rental loss if you are renting the property to a relative/friend for the same rate as you would charge other tenants and you reasonably expect to make a profit.
Someone owns a 3 bedroom home, the entire square footage of the home is 1,200 square feet.
– the home owner rents out 2 bedrooms and gives the renters full access to the rest of the common areas of the home. Living Room, Kitchen, Bathroom.
The Monthly house expenses are as follows:
Natural Gas: $90
Property Taxes: $140
Mortgage INTEREST: $700
TOTAL HOUSE EXPENDITURES $1,310.00
You all share the house space equally therefore $1,310 / 3 = 436.67 each
You charge each of your tenants $500 a month rent.
You have an expectation of profit monthly of $63.33 per month or $936.67 for the year.
This is a rental arrangement
You have all the same expenses however you only charge $350 per month to your roommates. (350 – 436.67 = -86.67) there is no reasonable expectation of profit. This is a Cost Sharing arrangement. You do not claim the income, nor do you claim the expenses when you file your income tax return.
Repairs and maintenance – you pay someone else to cut your lawn and clean your gutters for you. You cannot deduct a expense if you do this yourself. However, if you repair the gutter or the lawn mower yourself then the parts purchased are deductible under repairs and maintenance.
Monthly mortgage payment – your full monthly mortgage payment (principal and interest portion) is not deductible. Only the mortgage interest of the monthly payment.